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FHA is set to make several changes to their policies in September and while most of the changes shouldn’t have any major impact, one change will be significant. FHA is changing they way they view deferred student loans. The current policy is that if a borrower can prove that the loan(s) are deferred at least 12 months, there will not be a payment counted in the monthly debt-to-income. So when a lender calculates a customer’s debt-to-income and ability to repay, those are not taken into consideration. Beginning September 14th, this is set to change. FHAs new rule is that a lender must determine what the payment will be even if the loan is deferred. If a payment cannot be determined then the lender must use 2% of the outstanding balance.
The assumption in the lending community is that the USDA Loan will become even more attractive to borrowers because USDA currently has this policy in place and it sometimes pushed borrowers to the FHA loan. Now that the playing field is equal in terms of deferred student loans, those borrowers who would have chosen an FHA loan because of student loans may now refer back to the USDA Loan.
The USDA Loan has several other benefits as compared to other loan types. One of the major features is the no money down requirement. Additionally, the seller is allowed to pay up to 6% of the sales price toward closing costs. In most cases, this is more than enough to cover closing costs and pre-paids. The USDA Loan also has a lower factor used for the monthly mortgage insurance compared to FHA. The USDA factor is .50% where FHA is .85%. This is significant because the savings can be hundreds if not thousands of dollars over the life of the loan.
Now that FHA is making this change there are only a few things that would make it a more attractive loan than the USDA Loan. USDA does have a few restrictions such as property location and maximum household income. This restricts individuals or families who want to buy in an area that does not qualify for the USDA Loan or if their combined household income is greater than the maximum allowed by USDA.
With the exception of a few scenarios, the USDA Loan will be much more attractive to borrowers once FHA makes the changes in September. With no down payment required and low mortgage insurance, customers will choose it over the FHA loan in most situations.
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